Pension funds could be 5 per cent worse off over 30 years if they don't consider a tax-optimised wrapper, according to new research.
A joint report published yesterday by pensions and benefits consultancy Hymans Robertson and asset manager Vanguard revealed some fund wrappers were not recognising the full tax privileges of UK defined contribution (DC) pension fund investors.
This may lead to material losses over time – resulting in a ‘hidden’ tax drag which may reduce returns by around 0.3 per cent a year on average.
This means failing to consider a tax-optimised wrapper could reduce an individual’s ultimate retirement pot by 5 per cent over the course of a DC "savings journey".
Gavin Lewis, head of institutional UK at Vanguard, said: "Failing to deliver tax benefits to retirement savers is equivalent to an unnecessary cost. These costs have a material impact on people’s lives. A 5 per cent shortfall in retirement savings may mean the need to delaying retirement, or to accept a lower quality of life in retirement.
"Vehicles offering retirement savers the dual advantages of tax-efficiency and ring-fencing of their assets, give investors a better chance of successful retirement outcomes."
The means a saver targeting a pot of £250,000 over 30 years might need to save an additional £12,500 than if they were saving through a more tax efficient vehicle with similar costs.
Douglas Anderson, partner and founder of life and financial services at Hymans Robertson, said: "The fund management industry appears to be at a turning-point when it comes to wrappers and we’re now seeing a more widespread appreciation of the advantages that alternative fund wrappers can offer over more traditional versions.
"Trustees and governance committee seeking simplicity and clarity will value tax transparent funds for their ability to offer greater tax efficiency benefits.
"Every pension scheme has its own goals and targets and trustees should ensure that whichever wrapper they select is the best for both their members and the scheme as a whole. However, it is important that schemes ensure they are not falling into this avoidable tax drag which can significantly impact an individual’s final pension pot over a saver’s lifetime."
Mel Kenny, chartered financial planner for London-based Radcliffe & Newlands, said: "With the recent abolition of indexation relief on corporate capital gains, it is clear the government is continuing to look at ways to tax via stealth and therefore increases the emphasis on making sure the tax privileges that are still available, are used."
